‘Start Managing Margins’: An Interview With Dr. Timothy Malone

Economists say we’re experiencing the most troubled U.S. economy since the Second World War. That isn’t news to independent jewelers, many of whom felt the negative effects months ago, thanks to gold’s rising price, higher business costs, and fewer customers.

So, what’s a businessperson to do? How can an independent not only survive but also thrive during downtimes? This summer, JCK has been asking the experts, and this month, Dr. Timothy Malone—who has more than three decades of sales and marketing management experience and is an associate professor at the School of Business of the Gemological Institute of America—addresses those questions.

“During economic downtimes, independents tend to micromanage their labor cost, reduce working capital and inventory, and ask for more memo goods. They should always do that—but the context of how and why they do it is different in downtimes,” says Malone. “For example, if they don’t count traffic flow, how can they know when, where, or if to make cost cuts in labor?

“It takes a different style of management when things are going down than when things are growing,” he notes. “You must find your most vulnerable points immediately and stop the bleeding.”

In the following interview, Malone spotlights eight areas in which jewelers can take the initiative during slow economic periods.

What is the most important thing an independent jeweler should do when times are tough?

Adopt an attitude of performance improvement, not one of cost cutting. Any accounting-oriented person can cut costs. But in doing so, those cuts could cripple the company’s ability to create value for the customer. It takes only limited talent to cut costs. What is necessary is the talent and skill to know how to minimize expenditures in those areas that don’t create the return on investment that other areas in the business do. For example, cut back on mass-media advertising and communicate directly with targeted customers one to one. So, it’s about the right investments to create the greatest performance improvements. That should be a focus in up times or down.

Such as?

Don’t simply cut back on labor. Reevaluate and measure trends in shopper traffic flow in your store and make knowledgeable adjustments. Use event marketing to generate more foot traffic. Call loyal customers and invite them to VIP shopping experiences and personalized showings. Get customers to bring in their jewelry wardrobes and find ways to extend their ability to wear more jewelry more often. Women with predominantly yellow gold jewelry, for example, seem to respond well to new pieces that combine white and yellow gold to complement their existing jewelry pieces. Reevaluating and making knowledgeable adjustments also applies to your advertising expenditures.

What do you mean?

If you can’t measure the effectiveness—that means the investment return—of an advertising expenditure, if you don’t know whether or not you need to do it, then stop using it. This should always be the case, but especially so during challenging times.

For example, consider your Yellow Pages advertisement. If you don’t put an unlisted number in it, how can you measure the response you get to it? That means, how many calls or new customers is the ad creating weekly or monthly, and what do they eventually purchase? The Yellow Pages people won’t advise you to include an unlisted number, because Yellow Pages ads typically require a 12-month contract and aren’t performance based. You pay regardless of whether you get any new business or not. Including that unlisted phone number is just one example of a marketing return-on-investment metric. You should be measuring the ROI on all your types of advertising.

What else about advertising should get more attention?

Use word-of-mouth advertising. Customers are at their emotional peak when they say they want to buy an item.

That’s the best time to ask each shopper-turned-customer to refer your company, brand, and products to friends and acquaintances. Tell them why they’re smart to choose what you offer; that way, they’ll be better prepared to share your story with others. When sales associates take the time to really listen to a shopper and to ask for their opinion, the salesperson creates goodwill and flatters a shopper’s ego. Researchers call this phenomenon “psychological indebtedness.” It can significantly motivate customers to share their positive shopping experiences with others.

How do you generate that in times like these?

In a down market, it means better communication with customers, soliciting their engagement, helping them understand what their fashion, accessories, and jewelry preferences are. Then they can better articulate what you’ve told them, transforming them from a state of need to a state of desire. This is “experiential marketing.” The customer gains value just by being in the store. When fewer customers come in to buy during downtimes, use it as an opportunity to create more goodwill with those who do. Spend more time with them and educate them about the superior value of your offerings. This will certainly create more rapport with customers—and improve your salespeople’s ability to transform shoppers into customers.

What else should independent jewelers measure?

Know how your target market is responding to a downturn in the economy. For example, a store’s customers will continue to purchase jewelry for gift-giving occasions—just not at the same dollar amount. So, trade down. Offer more affordable jewelry in some categories while still offering “like” merchandise. For example, some 1.00 ct. diamond buyers might be more interested in diamonds that are ever-so-slightly under a full carat. That way, the store is still selling the same quality, but offering more value for the dollars invested. Seek out merchandise with greater eye appeal and items that look more expensive than their retail prices. Offer gemstone jewelry that accents a hot fashion color, like orange.

Let’s talk about employees. What should independents do now?

Find new ways to motivate employees and pay for improved performance. For example, consider increasing the commissions on slow-moving merchandise. You’ll find those reasons why an item won’t sell suddenly go away with the right employee motivation. Another motivator is recognition. Studies show compensation actually ranks fourth in overall job importance with salespeople. Topping the list is recognition. There are so many ways to bestow recognition on an employee, even something as simple as complimenting an employee who greets people positively at the door when they come in.

If sales associates have assigned accounts, mail printed materials with their name included in the message. More stores should also encourage sales associates to wear jewelry pieces. Who doesn’t believe wearing jewelry makes people feel better about themselves?

What about vendors?

Never stop negotiating with them, and that starts by giving yourself permission to negotiate. It’s amazing how many folks just don’t do this. Usually vendors tell the retailers the rules, and the retailer accepts that. They only ask about price and discounts. They don’t ask, or hesitate to ask, about other things like billing, additional shipping times, or reduced dollars on stock balancing orders. But now is the time to turn to suppliers for additional support. Independents should ask for deeper discounts and delayed billing to improve cash flow. Ask for lower minimums to improve stock balancing. Ask for better margins on memorandum goods. Negotiate for more vendor-paid promotions. And draw up a buying plan with specs of each of your vendors, all the points of cooperation each might offer. This becomes your guide for negotiating with vendors.

What about pricing?

Stop thinking markup and start managing margins and GMROI [gross margin return on investment]. Every jewelry store discounts one way or another, so start tracking vendors by category, subcategories, and by each item’s ability to contribute to total sales. There must be no more sacred lambs. All vendors, even those who are great friends, need to pull their own weight and provide products that truly generate the profit margins a jeweler demands.

And the bottom line is?

Cash flow is king. So, manage for turnover. Managing a store during downtimes calls for different objectives and tactics. The key is creating more and more cash flow. Redefine what you mean by aged inventory. If it’s one year, then change that to six to nine months. Buy what you can sell, not what you personally like. Have a relationship with the customers, not the jewelry.

Use e-mail to keep down media costs. Use a Web site to share information and educate customers. Call those who haven’t been in the store for a while and offer compelling reasons they should come back, such as a pendant or earrings that match that necklace they bought last year. Ask permission to e-mail customers and pre-sent those pieces in four-color visuals. Stimulate them to come in again.

Jewelers are in a unique position these days. Margins are becoming more difficult to increase, so the name of the game now is to increase the store’s foot traffic and sell more product to existing customers. Generate more turns and keep the cash flowing.